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Janus Takes Big Risks Again

Perhaps it's Denver's thin air that drives the fund managers there to take big risks. Don't get me wrong. Denver is one of my favorite cities. But Mile High City fund companies seem unaccountably addicted to adrenaline.

After overdosing on high-octane stocks, Founder's was swallowed years ago by Dreyfus. Similarly, INVESCO Funds Group hit a huge pothole, and its name was retired. That leaves, of course, Janus, the firm that put Denver on the mutual fund map.

Once May had mercifully ended, I asked Morningstar which diversified foreign stock funds had the highest percentage in emerging markets. Janus Overseas (symbol JAOSX) ranked first by a country mile among funds targeted to individual investors. It held 34% of assets in emerging markets. To my way of thinking, that's an outrageous weighting in emerging markets for a fund that bills itself as a diversified foreign stock fund. Emerging markets make up only about 10% of the market value of foreign stock markets.

I'm not opposed to emerging markets. Emerging markets are a perfect place to stash some or all of the stock money that you're willing to take big risks with. And now may be a good time to buy emerging markets; after all they're more than 10% cheaper than they were a month ago.

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But funds need to practice truth in labeling. And Janus Overseas flunks that test. What's more, Janus Contrarian, a domestic stock fund, earns an F-minus. At last count, the fund (JSVAX) had almost 40% of assets overseas, including 17% in India.

That these investments have hugely helped, rather than hurt, performance in the past several years isn't the point. Shelley Peterson, a Janus spokeswoman, disagrees. "The fact is Janus's research helped Janus Contrarian fund and Janus Overseas fund shareholders capitalize on some great emerging-markets opportunities well before and well in excess of the decline." She's correct.
But what goes up rapidly often goes down just as fast.

'90s flashback

We've seen this movie before. In the late 1990s, the firm produced sizzling returns and attracted total assets of $330 billion by hitching a ride on tech and telecom stocks. Unfortunately, Janus managers ladled far too much of the assets of their diversified stock funds into those two soaring sectors. In the subsequent bear market, more Janus investors probably lost more money than investors at any other fund firm. Other firms produced worse results, but most of those were small firms.

Who can forget the Janus television ads of the late 1990s? One showed a Janus stock analyst hard at work on a Saturday night calling restaurants to see how long the waits were -- and thus getting a leg up on how business was going. Another showed an analyst underground in Manhattan talking to workers laying fiber optic cable.

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The message was clear: Janus had more analysts working harder to dig out the facts on companies. The ads resonated, and money poured in. There was just one problem: The message wasn't true. Janus wasn't rich in analysts. Indeed, it employed a mere 19 stock analysts at the height of the bull market in 1999.

As its funds tumbled during the bear market, Janus seemed chastened. The research director conceded Janus hadn't had enough analysts to allow the funds to adequately diversify into other sectors once tech and telecom nose-dived. Changes were made. New managers and analysts and a new chief executive were brought in as Janus began a rebuilding -- a process I thought was going along fairly well.

Danger zone

But now it turns out that Janus has done the same thing again -- albeit on a smaller scale. They stuffed what were supposed to be diversified funds with stocks from the riskiest sector of the market. They didn't lose investors a ton of money this time. But, after all, what happened in May was a pinprick in terms of the wounds the stock market can inflict. What will happen when another bear market hits?

Maybe the only answer is for the board of directors to uproot the whole firm and move it to some boring, rust belt city. Barring such an unlikely move, treat Janus funds gingerly. If you must invest in one, please first examine its holdings closely -- then check back frequently to make sure the fund manager isn't loading up on high fliers.